Intrinsic value of Home Depot - HD

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$154.83

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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$154.83

 
Intrinsic value

$98.94

 
Up/down potential

-36%

 
Rating

sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of HD stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2017), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 186.1

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  6.86
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.43
  5.38
  5.34
  5.31
  5.28
  5.25
  5.23
  5.20
  5.18
  5.16
  5.15
  5.13
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
  5.06
  5.06
  5.05
  5.05
  5.04
  5.04
Revenue, $m
  94,595
  100,082
  105,806
  111,782
  118,023
  124,544
  131,359
  138,486
  145,940
  153,739
  161,903
  170,450
  179,400
  188,775
  198,598
  208,891
  219,680
  230,990
  242,847
  255,281
  268,321
  281,998
  296,345
  311,396
  327,186
  343,755
  361,140
  379,383
  398,529
  418,622
  439,711
Variable operating expenses, $m
 
  72,847
  77,002
  81,339
  85,869
  90,602
  95,548
  100,720
  106,131
  111,791
  117,716
  123,710
  130,206
  137,011
  144,140
  151,611
  159,441
  167,649
  176,256
  185,280
  194,744
  204,671
  215,084
  226,007
  237,468
  249,493
  262,111
  275,352
  289,247
  303,831
  319,137
Fixed operating expenses, $m
 
  12,931
  13,255
  13,586
  13,926
  14,274
  14,631
  14,996
  15,371
  15,756
  16,150
  16,553
  16,967
  17,391
  17,826
  18,272
  18,729
  19,197
  19,677
  20,169
  20,673
  21,190
  21,719
  22,262
  22,819
  23,389
  23,974
  24,573
  25,188
  25,817
  26,463
Total operating expenses, $m
  81,168
  85,778
  90,257
  94,925
  99,795
  104,876
  110,179
  115,716
  121,502
  127,547
  133,866
  140,263
  147,173
  154,402
  161,966
  169,883
  178,170
  186,846
  195,933
  205,449
  215,417
  225,861
  236,803
  248,269
  260,287
  272,882
  286,085
  299,925
  314,435
  329,648
  345,600
Operating income, $m
  13,427
  14,303
  15,549
  16,857
  18,228
  19,668
  21,180
  22,769
  24,438
  26,192
  28,037
  30,186
  32,227
  34,373
  36,632
  39,009
  41,511
  44,144
  46,915
  49,833
  52,904
  56,138
  59,542
  63,126
  66,900
  70,872
  75,055
  79,458
  84,094
  88,974
  94,111
EBITDA, $m
  15,400
  16,424
  17,779
  19,201
  20,692
  22,256
  23,898
  25,623
  27,434
  29,338
  31,338
  33,441
  35,653
  37,979
  40,425
  42,998
  45,706
  48,555
  51,553
  54,708
  58,029
  61,524
  65,202
  69,074
  73,148
  77,438
  81,952
  86,704
  91,705
  96,969
  102,509
Interest expense (income), $m
  924
  916
  962
  1,052
  1,146
  1,245
  1,348
  1,455
  1,568
  1,685
  1,808
  1,937
  2,072
  2,213
  2,361
  2,515
  2,678
  2,848
  3,026
  3,213
  3,409
  3,615
  3,831
  4,057
  4,294
  4,543
  4,804
  5,079
  5,366
  5,668
  5,985
Earnings before tax, $m
  12,491
  13,387
  14,588
  15,805
  17,082
  18,423
  19,833
  21,314
  22,870
  24,507
  26,229
  28,249
  30,155
  32,161
  34,271
  36,494
  38,833
  41,296
  43,889
  46,620
  49,495
  52,523
  55,712
  59,070
  62,606
  66,329
  70,251
  74,380
  78,728
  83,306
  88,126
Tax expense, $m
  4,534
  3,614
  3,939
  4,267
  4,612
  4,974
  5,355
  5,755
  6,175
  6,617
  7,082
  7,627
  8,142
  8,683
  9,253
  9,853
  10,485
  11,150
  11,850
  12,587
  13,364
  14,181
  15,042
  15,949
  16,904
  17,909
  18,968
  20,083
  21,256
  22,493
  23,794
Net income, $m
  7,957
  9,772
  10,649
  11,537
  12,470
  13,449
  14,478
  15,559
  16,695
  17,890
  19,147
  20,622
  22,013
  23,477
  25,018
  26,640
  28,348
  30,146
  32,039
  34,032
  36,131
  38,342
  40,670
  43,121
  45,702
  48,420
  51,283
  54,297
  57,471
  60,813
  64,332

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  2,538
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  42,966
  42,770
  45,216
  47,770
  50,437
  53,224
  56,136
  59,182
  62,367
  65,701
  69,189
  72,842
  76,667
  80,673
  84,871
  89,270
  93,880
  98,714
  103,781
  109,095
  114,667
  120,512
  126,643
  133,075
  139,823
  146,904
  154,333
  162,130
  170,312
  178,898
  187,911
Adjusted assets (=assets-cash), $m
  40,428
  42,770
  45,216
  47,770
  50,437
  53,224
  56,136
  59,182
  62,367
  65,701
  69,189
  72,842
  76,667
  80,673
  84,871
  89,270
  93,880
  98,714
  103,781
  109,095
  114,667
  120,512
  126,643
  133,075
  139,823
  146,904
  154,333
  162,130
  170,312
  178,898
  187,911
Revenue / Adjusted assets
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
  2.340
Average production assets, $m
  22,053
  23,319
  24,653
  26,045
  27,499
  29,019
  30,607
  32,267
  34,004
  35,821
  37,723
  39,715
  41,800
  43,985
  46,273
  48,672
  51,185
  53,821
  56,583
  59,481
  62,519
  65,706
  69,048
  72,555
  76,234
  80,095
  84,146
  88,396
  92,857
  97,539
  102,453
Working capital, $m
  3,591
  2,402
  2,539
  2,683
  2,833
  2,989
  3,153
  3,324
  3,503
  3,690
  3,886
  4,091
  4,306
  4,531
  4,766
  5,013
  5,272
  5,544
  5,828
  6,127
  6,440
  6,768
  7,112
  7,474
  7,852
  8,250
  8,667
  9,105
  9,565
  10,047
  10,553
Total debt, $m
  23,601
  23,461
  25,663
  27,961
  30,362
  32,869
  35,491
  38,232
  41,099
  44,099
  47,238
  50,526
  53,968
  57,574
  61,352
  65,311
  69,460
  73,810
  78,371
  83,153
  88,169
  93,429
  98,947
  104,736
  110,809
  117,181
  123,868
  130,885
  138,248
  145,977
  154,088
Total liabilities, $m
  38,633
  38,493
  40,695
  42,993
  45,394
  47,901
  50,523
  53,264
  56,131
  59,131
  62,270
  65,558
  69,000
  72,606
  76,384
  80,343
  84,492
  88,842
  93,403
  98,185
  103,201
  108,461
  113,979
  119,768
  125,841
  132,213
  138,900
  145,917
  153,280
  161,009
  169,120
Total equity, $m
  4,333
  4,277
  4,522
  4,777
  5,044
  5,322
  5,614
  5,918
  6,237
  6,570
  6,919
  7,284
  7,667
  8,067
  8,487
  8,927
  9,388
  9,871
  10,378
  10,909
  11,467
  12,051
  12,664
  13,308
  13,982
  14,690
  15,433
  16,213
  17,031
  17,890
  18,791
Total liabilities and equity, $m
  42,966
  42,770
  45,217
  47,770
  50,438
  53,223
  56,137
  59,182
  62,368
  65,701
  69,189
  72,842
  76,667
  80,673
  84,871
  89,270
  93,880
  98,713
  103,781
  109,094
  114,668
  120,512
  126,643
  133,076
  139,823
  146,903
  154,333
  162,130
  170,311
  178,899
  187,911
Debt-to-equity ratio
  5.447
  5.490
  5.680
  5.850
  6.020
  6.180
  6.320
  6.460
  6.590
  6.710
  6.830
  6.940
  7.040
  7.140
  7.230
  7.320
  7.400
  7.480
  7.550
  7.620
  7.690
  7.750
  7.810
  7.870
  7.920
  7.980
  8.030
  8.070
  8.120
  8.160
  8.200
Adjusted equity ratio
  0.062
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  7,957
  9,772
  10,649
  11,537
  12,470
  13,449
  14,478
  15,559
  16,695
  17,890
  19,147
  20,622
  22,013
  23,477
  25,018
  26,640
  28,348
  30,146
  32,039
  34,032
  36,131
  38,342
  40,670
  43,121
  45,702
  48,420
  51,283
  54,297
  57,471
  60,813
  64,332
Depreciation, amort., depletion, $m
  1,973
  2,121
  2,230
  2,344
  2,463
  2,588
  2,718
  2,854
  2,997
  3,145
  3,301
  3,255
  3,426
  3,605
  3,793
  3,989
  4,196
  4,412
  4,638
  4,875
  5,124
  5,386
  5,660
  5,947
  6,249
  6,565
  6,897
  7,246
  7,611
  7,995
  8,398
Funds from operations, $m
  9,486
  11,893
  12,879
  13,881
  14,933
  16,037
  17,196
  18,413
  19,692
  21,036
  22,449
  23,877
  25,439
  27,083
  28,811
  30,630
  32,543
  34,557
  36,677
  38,908
  41,256
  43,727
  46,329
  49,068
  51,951
  54,986
  58,180
  61,543
  65,082
  68,808
  72,730
Change in working capital, $m
  -297
  132
  137
  143
  150
  156
  164
  171
  179
  187
  196
  205
  215
  225
  236
  247
  259
  271
  285
  298
  313
  328
  344
  361
  379
  398
  417
  438
  459
  482
  506
Cash from operations, $m
  9,783
  11,623
  12,742
  13,738
  14,783
  15,881
  17,032
  18,242
  19,513
  20,849
  22,253
  23,672
  25,225
  26,858
  28,575
  30,383
  32,285
  34,286
  36,392
  38,609
  40,943
  43,399
  45,985
  48,707
  51,572
  54,588
  57,763
  61,105
  64,623
  68,326
  72,224
Maintenance CAPEX, $m
  0
  -1,808
  -1,911
  -2,021
  -2,135
  -2,254
  -2,379
  -2,509
  -2,645
  -2,787
  -2,936
  -3,092
  -3,255
  -3,426
  -3,605
  -3,793
  -3,989
  -4,196
  -4,412
  -4,638
  -4,875
  -5,124
  -5,386
  -5,660
  -5,947
  -6,249
  -6,565
  -6,897
  -7,246
  -7,611
  -7,995
New CAPEX, $m
  -1,621
  -1,266
  -1,334
  -1,392
  -1,454
  -1,519
  -1,588
  -1,660
  -1,737
  -1,817
  -1,902
  -1,991
  -2,085
  -2,184
  -2,289
  -2,398
  -2,514
  -2,635
  -2,763
  -2,897
  -3,038
  -3,187
  -3,343
  -3,507
  -3,679
  -3,860
  -4,051
  -4,251
  -4,461
  -4,682
  -4,914
Cash from investing activities, $m
  -1,583
  -3,074
  -3,245
  -3,413
  -3,589
  -3,773
  -3,967
  -4,169
  -4,382
  -4,604
  -4,838
  -5,083
  -5,340
  -5,610
  -5,894
  -6,191
  -6,503
  -6,831
  -7,175
  -7,535
  -7,913
  -8,311
  -8,729
  -9,167
  -9,626
  -10,109
  -10,616
  -11,148
  -11,707
  -12,293
  -12,909
Free cash flow, $m
  8,200
  8,549
  9,496
  10,325
  11,194
  12,107
  13,066
  14,073
  15,131
  16,244
  17,414
  18,589
  19,884
  21,247
  22,681
  24,191
  25,781
  27,455
  29,218
  31,074
  33,029
  35,088
  37,256
  39,540
  41,945
  44,479
  47,147
  49,957
  52,916
  56,033
  59,315
Issuance/(repayment) of debt, $m
  2,274
  1,112
  2,202
  2,298
  2,400
  2,508
  2,621
  2,741
  2,867
  3,000
  3,140
  3,287
  3,442
  3,606
  3,778
  3,959
  4,149
  4,350
  4,561
  4,782
  5,015
  5,260
  5,518
  5,789
  6,073
  6,372
  6,687
  7,017
  7,364
  7,728
  8,111
Issuance/(repurchase) of shares, $m
  -6,662
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -4,466
  1,112
  2,202
  2,298
  2,400
  2,508
  2,621
  2,741
  2,867
  3,000
  3,140
  3,287
  3,442
  3,606
  3,778
  3,959
  4,149
  4,350
  4,561
  4,782
  5,015
  5,260
  5,518
  5,789
  6,073
  6,372
  6,687
  7,017
  7,364
  7,728
  8,111
Total cash flow (excl. dividends), $m
  3,726
  9,661
  11,698
  12,623
  13,595
  14,615
  15,687
  16,814
  17,998
  19,244
  20,554
  21,876
  23,326
  24,853
  26,459
  28,150
  29,931
  31,805
  33,779
  35,857
  38,045
  40,348
  42,774
  45,329
  48,019
  50,851
  53,834
  56,974
  60,280
  63,761
  67,426
Retained Cash Flow (-), $m
  1,983
  -1,230
  -245
  -255
  -267
  -279
  -291
  -305
  -319
  -333
  -349
  -365
  -382
  -401
  -420
  -440
  -461
  -483
  -507
  -531
  -557
  -584
  -613
  -643
  -675
  -708
  -743
  -780
  -818
  -859
  -901
Prev. year cash balance distribution, $m
 
  1,286
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  9,717
  11,453
  12,368
  13,328
  14,336
  15,396
  16,509
  17,680
  18,911
  20,205
  21,511
  22,944
  24,452
  26,040
  27,711
  29,470
  31,322
  33,272
  35,325
  37,487
  39,764
  42,161
  44,686
  47,344
  50,143
  53,091
  56,194
  59,462
  62,903
  66,525
Discount rate, %
 
  7.80
  8.19
  8.60
  9.03
  9.48
  9.95
  10.45
  10.98
  11.52
  12.10
  12.71
  13.34
  14.01
  14.71
  15.44
  16.22
  17.03
  17.88
  18.77
  19.71
  20.70
  21.73
  22.82
  23.96
  25.16
  26.41
  27.73
  29.12
  30.58
  32.11
PV of cash for distribution, $m
 
  9,014
  9,785
  9,656
  9,432
  9,115
  8,712
  8,232
  7,685
  7,086
  6,448
  5,771
  5,106
  4,448
  3,813
  3,214
  2,662
  2,163
  1,723
  1,344
  1,026
  766
  557
  396
  273
  184
  120
  76
  46
  27
  16
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, and lawn and garden products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself, do-it-for-me (DIFM), and professional customers. The company offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its DIFM customers through third-party installers. It primarily serves home owners; and renovators/remodelers, general contractors, repairmen, installers, small business owners, and tradesmen. The company also sells its products through online. As of December 31, 2015, it had 2,274 stores, including 1,977 in the United States, 182 in Canada, and 115 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia.

FINANCIAL RATIOS  of  Home Depot (HD)

Valuation Ratios
P/E Ratio 23.4
Price to Sales 2
Price to Book 43
Price to Tangible Book
Price to Cash Flow 19
Price to Free Cash Flow 22.8
Growth Rates
Sales Growth Rate 6.9%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 7.9%
Cap. Spend. - 3 Yr. Gr. Rate 3.1%
Financial Strength
Quick Ratio 2
Current Ratio 0
LT Debt to Equity 515.8%
Total Debt to Equity 544.7%
Interest Coverage 15
Management Effectiveness
Return On Assets 20.1%
Ret/ On Assets - 3 Yr. Avg. 18.5%
Return On Total Capital 28.7%
Ret/ On T. Cap. - 3 Yr. Avg. 26.1%
Return On Equity 149.4%
Return On Equity - 3 Yr. Avg. 99.1%
Asset Turnover 2.2
Profitability Ratios
Gross Margin 34.2%
Gross Margin - 3 Yr. Avg. 34.2%
EBITDA Margin 16.3%
EBITDA Margin - 3 Yr. Avg. 15.6%
Operating Margin 14.2%
Oper. Margin - 3 Yr. Avg. 13.4%
Pre-Tax Margin 13.2%
Pre-Tax Margin - 3 Yr. Avg. 12.5%
Net Profit Margin 8.4%
Net Profit Margin - 3 Yr. Avg. 8%
Effective Tax Rate 36.3%
Eff/ Tax Rate - 3 Yr. Avg. 36.4%
Payout Ratio 42.8%

HD stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HD stock intrinsic value calculation we used $94595 million for the last fiscal year's total revenue generated by Home Depot. The default revenue input number comes from 2017 income statement of Home Depot. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our HD stock valuation model: a) initial revenue growth rate of 5.8% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 7.8%, whose default value for HD is calculated based on our internal credit rating of Home Depot, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Home Depot.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of HD stock the variable cost ratio is equal to 72.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $12616 million in the base year in the intrinsic value calculation for HD stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.1% for Home Depot.

Corporate tax rate of 27% is the nominal tax rate for Home Depot. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the HD stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for HD are equal to 23.3%.

Life of production assets of 12.2 years is the average useful life of capital assets used in Home Depot operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for HD is equal to 2.4%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $4333 million for Home Depot - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 1201.93 million for Home Depot is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Home Depot at the current share price and the inputted number of shares is $186.1 billion.


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Stock chart of HD Financial statements of HD Annual reports of HD
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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